January of any year is a good time to review your student debt, the options you have to manage it and possible opportunities to improve your situation. January is also the time to consider your tax needs which can be difficult and even harder for student loan borrowers who must deal with large government systems on an ongoing basis. Below are some useful tax tips.
Federal Student Loan Disability Discharges Are Tax-Free
In prior years, loan discharges for a borrower with a permanent disability were taxable. In short, the discharged debt amount was considered taxable income in the year of the discharge. Fortunately, recent legislation changed that and as of January 1, 2018 disability discharges are no longer taxable under federal law.
Tax Deductible Student Loan Interest
The federal tax code allows borrowers to claim some of the interest paid on federal student loans as a tax deduction. You should receive a 1098-E statement from your student loan lender which indicates interest paid. There is some variability in the tax code. There is a cap on the total allowable deduction for interest paid and if you’re a high-income individual, you may not be eligible.
Marriage or Divorce Considerations
If you were recently married or divorced and paying on federal student loans, your new tax filing status can impact your student loan repayment program. Some repayment programs factor in your tax filing status differently.
Reduced Adjusted Gross Income (AGI)
AGI and gross income are two different things. Your AGI is your gross income minus pre-tax deductions – for example contributions to a Health Spending Account (HSA). Contributing more to an HSA can reduce your AGI and student loan payments under an income-driven repayment plan.
Student Loan Borrowers in Default
The federal government does have the ability to intercept federal tax refunds – in the case of borrowers that are in default – and apply the refund amount to defaulted student loans. The program is called the Treasury Offset Program (TOP). If you are anticipating a federal tax refund you should consider first addressing any loans in default status.
HLP Is Not a Tax Advisor – Talk to a Tax Preparation Professional
Student loan law and the federal tax code are complex and can be difficult to manage through on your own. We always recommend speaking to an attorney, financial planner or Certified Public Accountant for assistance on tax matters. Higher Level Processing is not a tax advisor.
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